Employee Burden Rates & You: The Hidden Truth You’re Ignoring, And What It Will Cost You

Burden Rate: The amount of money that a business is required to earn each week/month/year before a profit is turned.

As we’ve touched on before, the burden rate of a business is something that you MUST be cognizant of, lest you be destined to fail. By comprehending your burden rate, you can begin to determine where cost savings can occur, where money is being lost – often unnecessarily – and where your business is headed.

Since we’ve already touched on that aspect of it (check out the history in this thread), I wanted to take today to take it one step further: What are your employees costing you?

Employees are, at their heart a necessary evil, or a joyous burden, depending on your perspective. For me, they’re a double-edged sword. For each one hired, you’re banking on the premise that they will have the skill, ambition, drive, and desire to fulfill their end of the bargain to the best of their ability, thereby making them more valuable come raise time. But how many of us are truly able to put a number on what each employee brings to the table? The answer might both surprise, and depress you. Here’s how you do it:

Each employee has a salary or hourly wage. Prior to each employee’s annual review (and if you’re not doing this, then shame on you to begin with – you’re practically asking for failure- or mediocrity at best), calculate all of the known quantities.

– Wages & bonuses over a 52-week period

– Federally mandated taxes that you contribute on their behalf (Medicare, FUTA, and State Unemployment)

– Benefits: Your portion of any and all benefits paid out to the employee – insurance premiums, profit sharing, company-sponsored events, etc.

– Any sick days, personal days, or vacation days that have accrued, but have not been used (including their impact on the above numbers!)

– Lost revenue due to non-presence (i.e. – when an employee has NOT been at your place of business, for one reason or another, and someone has had to cover for them, or they have not contributed to the productivity/billable bottom line due to the actions of others around them.) This is ESPECIALLY egregious when an employee who can provide billable hours is forced into a position of non-billable hours. They’re not only working far below their capacity, they’re costing you money in lost revenue and productivity.

– Lost revenue due to error (i.e. – we log all of the errors that each employee makes at the Machine Shop that I run. I calculate the lost revenue in both times, material, and outside services, then triple the labor number. The reason? You’ve lost the initial time to make the product (1x), you’ve had to re-make the product (2x), and the time spent to re-make the product was not permitted to make something new that would otherwise be billable (3x)

– Workman’s compensation insurance for that category per hour

– Any number of specialized facets that may occur in your business (i.e. – employee discounts vs. their purchases with said-same, et cetera.)

The first number that will ASTOUND you will come from businesses where production of billable hours/goods is in play. If they’re an employee who produces ‘billable’ hours, every hour that they are not present has a negative impact far greater than their sick pay, vacation pay, etc. Unfortunately, this needs to be considered in the Burden Rate.

I recommend developing a spreadsheet template so that you can copy and plug-in employees through the review cycle each year. You may also wish to figure operating expenses that pertain to the employee as well. In my case, Managing a Machine Shop, I can safely figure a portion of the utilities, tooling, raw materials, etc. into the mix, if I so choose. But don’t do this lightly, either.

What you find will startle you, but is also a good tool for proving or disproving the employee’s true worth. Often, business owners have no notion of what a ‘good’ or ‘bad’ employee really is. Sure, they might miss a lot of work but they’re super-productive when they’re there, so that makes up for it… right? No – not usually. By running these numbers, you can come to a number of your own: What it costs you to employ this person, per annum.

Once this number is reached, things can become a little vague. If you’re in a production environment, then it’s simple: Multiply the number of hours worked by the amount you charge for those hours and – then – compare it to your burden rate calculation. If there’s a decent profit there, then it might be time for a raise: a raise that comes with the expectation that, this time next year, that number will be relatively similar or even marginally better. Conversely, if the number comes up the other way, that employee that you perceived as great (or even just okay) has just proven otherwise. Here, you now have a decision to make, depending on the egregiousness of the offset. You may choose to show the employee these numbers, explaining WHY you cannot afford that raise they feel that they deserve. You can also use this as a tool to discuss areas for improvement with the employee – while being able to SHOW them the financial impact of their actions.

I see – time and time again – businesses that have a few stellar employees, who buoy one or many weaker ones. Some, who are actually costing the company far more than they’re worth to retain but, since no one’s checked the burden rates, nothing is ever done about it. I then see the business owner making a second mistake: telling the employees that there’s no money for raises. Lax employees probably won’t care – they know how good they’ve got it. Mediocre ones will probably get cranky and deter your profit margins a little more. The good ones will be savvy enough to realize the stupidity in that remark without burden-rate founding, and walk away. How do I know this? Because I myself – and my wife – have walked away from a number of jobs for just this reason. I also hire a lot of these folks – permanently – at my shop, when they walk away from other shops not performing this function. We get tired of hearing that we’re all being evaluated by vagary or – worse still – nothing more than, ‘We didn’t make enough profit for raises’, even though we know there is burden rate being wasted, needlessly. We’re the folks you want to keep, and – ironically – we’re the ones least likely to stay to support the employment-needy around us, and that you won’t fight to keep until it’s too late.

Think I’m being overly simplistic? Perhaps. But consider, if you’ve been in business long enough, how well your business has done, versus how well you FEEL it should have done. Consider how many good employees you’ve seen move on, because you, ‘Couldn’t afford to pay them those high wages they were asking for.’ Think of how many employees have been with you for years, and where you feel their value is on a scale from one to ten.

In other words: Take a big boy/girl pill. Take responsibility for your potential mismanagement, and rectify it by doing yourself the service of developing this burden rate technique. Then, implement it. I GUARANTEE that your business can be more profitable, without being the evil, money-grubbing ogre you’re probably thinking that I am right now. I’m not. I simply want to be paid what I’m worth, in reference to my peers, in a business that is well run so that my hard work will result not in financial crutches for my weaker co-workers, but grander things for myself, and the company.

You can often spot your highest producers. They’re the ones who you rely on the most, who you force to do the top-tier work – so that it’s done right. The ones you trust. And, probably, the ones you ride the hardest. These types of employees don’t usually mind this – some may even thrive on it. However, they do look for greener pastures once they spot inconsistencies in treatment that is not commensurate with wage values, or burden rate comparisons. If you ignore the above advice, you will find yourself churning through the occasional stellar employee, while finding yourself surrounded in permanence with the remoras who know a good thing when they get a paycheck from it. If a stellar employee is ridden too hard, and they suddenly make subtle changes to their demeanor or work day – look out. They’re inadvertently telling you that since you’ve given up on them, they’re giving up on you. And two-week’s notice won’t be far behind, as some other savvy employer snatches them up, to leave you floundering with the group they once bolstered.